By Molly Cook Escobar and Shaina Mishkin

The financial toll of the wildfires that swept through Southern California is unprecedented in modern history. Yet the data indicates the insurance industry may have seen the tragedy coming.

The fires are projected to be so costly that they could strain the state's insurance system and distort southern California's housing market for years to come. The ripple effects might even lead to higher insurance premiums for Americans nationwide, even though the fires scorched fewer acres than the infamous 2018 Northern California wildfires and claimed fewer lives, thanks to swift evacuations, than the hurricanes that ravaged New Orleans and Houston in recent decades.

What makes the Los Angeles wildfires uniquely devastating among the history of American natural disasters is their path through the Palisades, a neighborhood where the typical home value hovers around $3.4 million and the area's aging structures were tightly packed in a recognized high-risk fire zone.

It's a disastrous set of conditions for a home insurer. And the data show that the industry seemed to have recognized the financial risks and pulled out right before the fires struck.

In March 2024, less than a year before the fires, State Farm said it would not renew tens of thousands of California property insurance policies. The move was not evenly distributed across the state. In fact, its withdrawal from the Palisades was the most aggressive of any ZIP code in California, according to a filing by State Farm.

"State Farm serves more customers in California than any other insurer, and we've been doing this for nearly 100 years," a spokesperson told Barron's. State Farm pointed to its March statement that said it wouldn't renew about 30,000 California property insurance policies because the company "continues to be impacted by inflation, catastrophe exposure, reinsurance costs, and the limitations of working within decades-old insurance regulations."

It was a perfect set of conditions, fueled by unusually dry weather, that set the stage for the costly destruction. "What we're seeing in LA is predictable," says Jeremy Porter, head of climate implications at risk modeler First Street. "It's like a nightmare scenario."

What makes the neighborhood so desirable -- its proximity to nature atop the hills in Los Angeles -- was also its Achilles' heel. The ZIP code representing most of the Palisades covers about 24 miles, according to First Street -- but much of that space is undeveloped land covered in nature trails, rolling hills, and dry vegetation.

"Views are a big factor; it's always something everybody wants," says Ed Kaminsky, an agent with eXp Realty who works in the area. "But that was the cause of the fire -- this beautiful landscape, and trees, and brush."

Areas like this, where human development pushes up against wild, undeveloped areas, are so dangerous that urban planners, insurers and others have a term for them: wildland-urban interface, or WUIs for short. Over 63,000 of these communities straddling the wilderness are at risk of fires, according to a 2021 National Association of State Foresters report.

Many of the homes in the Pacific Palisades were squeezed into tight neighborhoods, with only about 12 to 15 feet of space between homes on average -- a narrower fit than the 20 to 40 feet typical for houses in suburban California, First Street says.

Strong winds pushed fire out of the undeveloped land where it began and onto the rows of homes along the perimeter, Porter said. "From there, it was just house-to-house ignition," he added, noting that First Street's risk models assume that a susceptible home exposed to fire will burn similar to grass.

The aging housing stock plays a part, too. Homes in the Pacific Palisades are nearly six decades old on average, according to property analytics company Attom. "We've seen a huge change in the building code over the last 20 or 30 years," says Firas Saleh, Moody's Director of North American Wildfire Models. The age means many don't "necessarily include all these different elements to possibly prevent some of these wildfires spreading," Saleh says.

As the fire spread from one home to the next, costs added up quickly. "Multi-million-dollar homes with priceless contents have already been lost in one of the world's most expensive neighborhoods," AccuWeather chief meteorologist Jonathan Porter said in a statement accompanying the company's preliminary cost estimates.

The combined factors that caused the fire to spread resulted in one of the worst possible outcomes. But you can spot expensive or rapidly appreciating home prices in areas susceptible to disaster in other parts of the country, too.

Increasingly, similar seven-figure price tags aren't the anomaly they used to be. The number of ZIP codes where the typical home value is higher than $1 million more than doubled between the end of 2019 and 2024, Zillow data show.

Houses haven't only become more expensive for buyers. They have also become more expensive to build -- or rebuild. The cost of building materials alone has increased 38% since the pandemic, according to the National Association of Home Builders.

Americans have piled into areas known to be at risk. "We have, over the last 20 or 30 years, built communities in places that we used to just let catch on fire in the summertime," says First Street's Porter. The same goes for other areas at heightened risk of disasters, like flooding. "Now...we just have more assets, more people, more communities at risk."

That's one reason why the financial toll of disasters has risen in recent years. Over the past five years, inflation-adjusted disasters tracked by the NOAA National Centers for Environmental Information cost an average $149 billion per year -- a much higher toll than the roughly $100 billion a year average in the 2010s and the $62 billion a year cost in the 2000s.

In places like the Palisades, where the desirable lifestyle comes with inherent risks, communities often change in the wake of a disaster, but don't go away. Some residents who don't want -- or can't afford -- to stay will leave, while others rebuild, prioritizing features designed to withstand the elements.

Take Sarasota, which was hit hard by Hurricane Milton late last year. Home buyers in the area, where prices can stretch into eight digits, are still shopping, says Sarasota-based Coldwell Banker agent Chelsa Vahtomin. But what they are looking for has changed, she says. Buyers who tour luxury condos want elevated parking to protect from a storm surge, for instance.

"They accept that hurricanes are a fact of life in Florida," she says. "They just work around them and prepare for them rather than avoiding the area."

Sources for main graphic: Zillow, CAL FIRE, State Farm, California FAIR Plan

Notes: Typical home value is the weighted average of the middle third of Zillow home value estimates in a given region. Percentages for State Farm and California FAIR plan are rounded.

Write to Molly Cook Escobar at molly.cookescobar@barrons.com and Shaina Mishkin at shaina.mishkin@dowjones.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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January 31, 2025 03:00 ET (08:00 GMT)

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